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Buyer’s Remorse: Russia and Ukraine.

Russian is a big exporter of natural gas to Western and Central Europe. During the life of the Soviet Union, the USSR had supplied natural gas to both the Ukraine region within the USSR and to Western Europe. The price charged Western European purchasers was below world market rate. Two of the USSR’s natural gas pipelines to Western Europe ran through Ukraine and carry 80 percent of Russia’s natural gas exports. After the Soviet Union broke up and Ukraine voted to secede, the Russians negotiated a natural gas agreement with Ukraine. The agreement provided that Ukraine would receive 17 billion cubic metres of natural gas per year as a fee for the pipelines that crossed Ukraine. This agreement also sold 8 billion cubic metres of natural gas to Ukraine at the prevailing world market price.

During the 1990s the Russians claimed that the Ukrainians had not paid for much of the gas that they received. They stopped deliveries of natural gas to Ukraine until they were paid, while continuing to ship gas through the pipelines across Ukraine. The Ukrainians then diverted some of the gas bound for Western Europe to make up for the suspended gas deliveries. (The government of Ukraine later admitted that they had done this.) The two countries finally settled this dispute in an agreement in October 2001.

Negotiations for a new agreement began in 2005. In the process, it was revealed that the Ukrainians had “misplaced” almost 8 billion cubic metres of gas that the Russian energy company Gazprom had stored in Ukrainian facilities in 2004-2005. When Ukraine balked at some of the Russian terms, the Russians cut down on gas deliveries in January 2006. Ukraine soon gave in. However, the Russians repeatedly claimed that the Ukraine of the “Orange Revolution” failed to pay for natural gas deliveries. Growing weary of Ukraine’s repeated “I will gladly pay you Tuesday for a hamburger today” approach, in early 2008 the Russkies said Ukraine had to pay the whole 2008 bill up-front or no more gas starting immediately. Ukraine’s government, headed by Yulia Timoshenko, rejected that deal.

In late 2008 Ukraine caved-in and paid what they owed the Russians. Negotiations for a 2009 agreement immediately broke down. The Ukrainians wanted a subsidized price, the Russians wanted the market rate; the Russians insisted on payment up front. The Russians turned off the tap in gas supplies to Ukraine, so Ukraine resorted to a number of under-handed practices in response: the pressure dropped in the pipelines to Western Europe (indicating siphoning by Ukraine); the government called on the EU to involve itself; and the Ukrainian court voided Ukraine’s agreement to trans-ship Russian gas to Western Europe. The Stockholm Tribunal of Arbitration soon smashed Ukraine’s pretensions. Moreover, this was costing everyone a lot of money. Eventually, in late January 2009, the two countries negotiated an agreement to cover the period to 2019.

Later in 2009 the Russians agreed to revise the contract in light of the recession in Ukraine. Then in 2010, they agreed to cut the price of gas to Ukraine by thirty percent in exchange for an extension of the lease on the naval base at Sebastopol to 2042.

In late 2013, Russia offered Ukraine a further big cut in price if it would not sign the Association Agreement with the EU. The overthrow of the Yanukovych government put an end to this discount. The Russian seizure of Crimea put an end to the discount for an extended lease on the Russian naval base there. Why pay rent for what you now own?

So, the stuff in the news about an “80 percent price increase” isn’t fully accurate.